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July 21, 2016

Earlier this month, Warner Bros. Home Entertainment, Inc. settled Federal Trade Commission charges for deceptive marketing practices stemming from a 2014 online “influencer” campaign for its video game Middle Earth: Shadow of Mordor. According to the FTC’s complaint, Warner Bros. paid YouTube influencers to post positive gameplay videos on YouTube and other social media platforms without ensuring that the influencers adequately disclosed their material connection to the company. As a result, the FTC took the position that the company’s marketing campaign violated the FTC Act because it insinuated that sponsored, positive gameplay videos posted on YouTube by gaming enthusiasts were objective and independent assessments of the video game, when they were not.

The Warner Bros. settlement highlights the importance of consumer product companies ensuring that all agreements governing the promotion of company products are reviewed by attorneys who are familiar with the FTC’s concerns about native advertising. In the Warner Bros. matter, the Company hired Plaid Social Labs, LLC to coordinate a “YouTube Influencer Campaign” to help generate interest for the Shadow of Mordor game. Plaid Social Labs contracted with influencers, tasking them with creating YouTube videos reviewing the game and then, subsequently, promoting the videos on other social medial platforms. Per the agreements, the influencers were required to disclose that the videos were sponsored, but they were instructed to place the disclosure in the description box below the gameplay videos. (According to the complaint, this requirement often resulted in the influencer placing the disclosure in a place that could only be seen if a viewer clicked on a “Show More” button.) The agreements also required the influencer’s reviews to be positive, prohibiting the influencer from showing any bugs or glitches in the game or communicating any negative sentiment about Warner Bros., its affiliates or the game.

The FTC took the position that the resulting videos were in essence “sponsored advertisements” and thus “misled consumers by suggesting that the gameplay videos of Shadow of Mordor reflected the independent or objective views of the influencers” when they did not. The FTC also took the position that Warner Bros., due to improper instruction and monitoring of the YouTube influencers, failed to adequately disclose that the gamers were compensated for their positive reviews.

This settlement is a helpful reminder of the importance of marketing and legal departments taking a collaborative approach when developing marketing campaigns that include special attention to the FTC’s enforcement priorities related to native advertising. It is no longer prudent for a company to rely on a third party marketing company or media consultant to handle digital media campaigns. Instead, to mitigate risk, the strategy must include a legal review focused on ensuring that the relationship between the company and potential influencers does not develop unexpected legal obligations for the company.

October 02, 2014

The Federal Trade Commission (FTC) receives information about consumer protection issues from various sources, from consumer and competitor complaints, to referrals from states and self-regulatory bodies, to the agency’s own monitoring initiatives. It was the latter -- named Operation Full Disclosure -- that resulted in the FTC sending warning letters to over 60 companies about their advertising disclosure practices. Although the FTC didn’t name names, it did say that among the recipients were 20 of the top 100 advertisers and advertisers of a wide range of products and services. According to the FTC, the ads of companies receiving letters failed clearly and conspicuously to disclose material information necessary to avoid misleading consumers, such as conditions for receiving the advertised price, the presence of an automatic renewal feature, the basis for product comparisons, representative results in testimonials, or safety issues.

Even if your company did not receive a warning letter, now is a good time to take the time to see how your companies’ ads stand up to the FTC’s guidance for clear and conspicuous disclosures. Operation Full Disclosure may foreshadow additional enforcement action in this area, and it may prompt consumers, competitors, and others to be more vigilant. Indeed, during the opening day of the National Advertising Division’s annual conference on September 29, FTC Chairwoman Ramirez said that if advertisers do not voluntarily make changes to their disclosure practices where needed, the agency will bring enforcement actions.

August 29, 2014

For some time the FTC has been focused on mobile shopping apps and whether businesses have been providing consumers with enough information about those apps. We have previously blogged about the FTC’s concerns about mobile payment technologies here.

Earlier this month, the FTC continued its efforts in this area and issued a staff report on mobile shopping apps, complete with recommendations for the companies that provide these apps. The gist of the recommendations? Provide consumers with clear and accurate information -- available before they download the apps -- about privacy, security, and who has liability for unlawful or erroneous purchases using the apps.

The report addresses three types of mobile shopping apps: price comparison apps; “deal apps” that locate coupons and discounts; and in-store purchase apps. The FTC staff identified a total of 121 apps in these categories, and evaluated all of the available “pre-download” terms and disclosures for each.

Based on its analysis, the FTC staff offered a number of recommendations:

The FTC staff found that companies generally disclosed, prior to downloading, that consumer information would be collected, but that those disclosures contained, in the words of the report, “broad and vague” statements about how the data would be used. For instance, disclosures state that data might be used to “enhance” users’ shopping experience, or indicate the “primary purpose” for collecting data without clearly stating what secondary purposes might be served by the data collection. The report recommends clarifying how such data will be used.

Similarly, the report expressed concern that policies often state that data will not be sold or shared “except as described,” but then reserve very broad rights to use the data. Moreover, up to one-third of policies reviewed allow companies to share data with no restrictions. The FTC recommends that companies clearly describe how they collect, use, and share consumer data.

The report found that data security assurances are generally included in pre-download disclosures, but according to the staff such assurances are not always backed by effective security practices, and the report recommends that companies improve in this area. Further guidance from the FTC on this topic is available here.

With respect to in-store purchase apps, the FTC staff concluded that terms concerning liability and dispute resolution are often unclear and sometimes misleading:

The report finds that nearly half of the in-store purchase apps reviewed did not disclose how the app company would handle an unauthorized, fraudulent, or erroneous transaction. The FTC recommends that companies disclose consumers’ rights and liability limits for such transactions.

As the FTC staff notes in the report, when an app allows the user to pass charges through to an external funding source (e.g., a bank account or credit card), such users are protected by federal liability limits. Nonetheless, according to the report, several companies who offer such apps disclaim all liability in their pre-download information which may lead users to believe that they must pay for unauthorized charges of any amount. The report therefore recommends that companies provide users with clear information about statutory liability limits.

The report concludes that consumers may not realize that apps using a “stored value” model, in which users move money into an account associated with the app, have no statutory liability protection. The report recommends that companies tell consumers up front how the payment service works and what they can do if they encounter a problem.

The recurrent theme of the report was that the FTC staff wants companies to provide information that enables consumers to make informed, up-front decisions about the apps they download and use. To that end, the FTC recommends -- not for the first time -- that companies providing mobile shopping apps describe clearly how they collect, use, share, and secure consumers’ personal and financial data, and also that mobile payment companies should provide clear information regarding dispute resolution and liability limits.

June 17, 2014

The Federal Trade Commission (FTC) is proposing several changes to its Energy Labeling Rule affecting labels for various household items and appliances. The current rule requires manufacturers to attach a yellow EnergyGuide label to covered items. In addition to an energy consumption rating, the labels, which appear on items including refrigerators, air conditioners, and televisions, state estimated annual operating costs and show a range of energy consumption for similar models.

According to the FTC’s Press Release, the current amendments propose “expanded light bulb label coverage, an online label database, more durable labels for appliances, room air conditioner labels on boxes, improved ceiling fan labels, consolidated ranges on refrigerator labels, and updates to furnace labels.” Specifically, the FTC proposes expanding the light bulb labeling requirements to decorative and specialty bulbs; updating ceiling fan labels to follow the EnergyGuide label format used on other products; and consolidating ranges for refrigerators into three categories to facilitate comparison shopping by consumers.

The proposed online label database comes in response to requests by several organizations that paper labels be replaced by an online system. The Association of Home Appliance Manufacturers and BSH Home Appliance Corporation reported to the FTC that two-thirds of consumers conducted online research prior to buying appliances. The FTC proposal would require manufacturers to submit links for covered product labels, but would not remove the paper labeling requirements. The new system would also provide online retailers with digital labels to be used in advertising, and would allow brick-and-mortar retailers to print replacement labels for in-store items. Because manufacturers must already display online labels for covered products, the FTC believes that the proposal will not create a significant burden.

The proposed amendments reflect the FTC’s continuing efforts to help consumers choose and purchase higher efficiency appliances and cut down on energy costs. Written comments, which must be received by August 18, 2014, can be submitted here.

June 16, 2014

A recent New York Timesarticle describes how people with large followings on social media platforms like the Vine video service and Instagram are cashing in on their popularity by posting advertising. Advertisers are attracted to popular social media personalities because they can reach social media users where they spend a significant amount of their time. The article notes that there are guidelines for disclosing that social media posts are sponsored by an advertiser, and describes ways advertisers are doing so. This is a good reminder for those considering such social media marketing campaigns to freshen up on what those guidelines are to avoid getting tangled up with the Federal Trade Commission (FTC). The FTC has made clear that consumer protection principles apply in all forms of media, including social media. Both advertisers and the social media stars they partner with can be liable if they don’t follow them.

If the connection between an advertiser and endorser is not obvious, the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising require that consumers be told about the connection. Because it may not be obvious to consumers that an ad disseminated through consumer-generated social media -- such as a consumer-made video on Vine -- is in fact an ad, that fact may need to be disclosed. To avoid deception, disclosures about representative results from using a product or service or important terms of the offer may also be necessary. In addition, the disclosures will often need to be in the ad itself and not on a click-through webpage. The FTC’s .com Disclosures guidelines provide do’s and don’ts when making such disclosures in ads where space is at a premium, as it is in social media posts. The FTC has repeatedly cautioned that if a disclosure is necessary to avoid deception in an ad but it doesn’t fit in the medium being used, then the ad should be modified or not used. Social media can be a powerful tool for reaching potential customers, so it is worth understanding the FTC’s expectations. Failing to follow the FTC’s guidelines could result in an investigation and ultimately an injunction and perhaps consumer redress.

June 02, 2014

You’ve seen them at the bottom of articles on your favorite news websites -- the thumbnails and links under the heading “You May Like” or “From Around the Web” or “In the News.” But, you may not give much thought to how they got there. Internet advertising companies purchase this website space and then display advertising and links on behalf of their clients. The National Advertising Division (NAD) recently decided a dispute between two such companies (Congoo, LLC and Taboola, Inc.) over disclosures that are displayed with these advertising blocks. Congoo alleged that Taboola’s disclosure practices failed adequately to inform readers that the links were sponsored as opposed to editorial content from the website’s publisher.

Second, that it may be an unlawful deceptive practice to mislead consumers into making first contact even if the advertiser later tries to correct the misperception (see Policy Statement on Deception).

NAD concluded that Taboola was required clearly and conspicuously to disclose when the links it places are sponsored. NAD found that Taboola’s current “sponsored content” or “promoted content” disclosures were less likely to be noticed and understood by readers because they were located in the right corner (where readers are less likely to look) and in lighter and smaller text. Furthermore, NAD concluded that including the name of the sponsor below the content title was not sufficient, even considered together with the other disclosure. Accordingly, NAD recommended that Taboola modify the disclosures showing that the links were sponsored to make them more clear and conspicuous.

NAD also recommended that Taboola more explicitly convey the nature of the content being linked. NAD was particularly concerned with linked content that appeared to be news articles or sites with original content, but were in fact created by advertisers. NAD recommended that links to such content be discontinued or expressly disclosed as advertising.

Although you may not work for an Internet advertising company, chances are many of our readers deal with Internet advertising issues. Because of this and other recentactivity concerning “native” advertising -- i.e., advertising or promotional content that is closely integrated into the flow and feel of websites, apps, and other online and digital publications -- advertisers and website owners should consider whether and how they are disclosing the sponsorship of ads and other content they are placing or that are being placed on their sites.

May 16, 2014

Many retailers of goods, content, and services offer subscriptions that renew automatically without any additional action by their customers. This business model often is convenient for consumers and lucrative for businesses. However, recently-filed class actions against Spotify USA, Dropbox, and Hulu serve as a reminder to comply with California law or risk having those subscriptions deemed “gifts,” requiring refunds or imposing other penalties.

The complaints in each of the Spotify, Dropbox, and Hulu cases allege that the retailers offered California consumers automatically-renewing subscriptions without complying with a relatively recent California law governing automatic renewal of subscriptions. Automatically-renewing subscriptions offered in violation of this law could be deemed “unconditional gifts” exposing the retailer to refund claims and other remedies under California Unfair Practices Act. The outcomes of the pending lawsuits are uncertain, and Spotify recently succeeded in compelling the claims to arbitration under its terms of use (a topic on which we may comment in a future post). But retailers should be aware that non-compliance with California’s automatic-renewal law could result in significant exposure, and the law appears to be attracting the interest of the plaintiffs’ bar.

California’s automatic-renewal law has several specific disclosure and cancellation requirements, obligating most businesses offering automatically-renewing or continuous subscriptions to:

Present the following subscription terms in a clear and conspicuous manner, before the subscription agreement is fulfilled:

That the subscription will continue until the consumer cancels.

A description of the cancellation policy that applies to the offer.

The recurring charges that will be charged as part of the automatic renewal plan, that the amount of those charges may change (if that is the case), and (if known) the amount to which the charge will change.

The length of the automatic renewal term (or a statement that the subscription is continuous), unless the length of the term is chosen by the consumer.

The minimum purchase obligation (if any).

Obtain the consumer’s affirmative consent to the subscription terms before charging the consumer’s credit card, debit card, or other payment account (such as PayPal).

Provide an acknowledgement that the consumer can retain (such as an email) including the subscription terms, the cancellation policy, and information regarding how to cancel.

Provide a cost-effective, timely, and easy-to-use mechanism for cancellation (such as a toll-free phone number or an email address), described in the acknowledgement to the consumer.

For free trials, allow the consumer to cancel before payment, and provide cancellation instructions in the acknowledgement to the consumer .

Provide the consumer with a clear and conspicuous notice of any material changes to the subscription terms, and provide cancellation instructions with the notice.

Retailers offering automatically-renewing subscriptions to California consumers would do well to audit their current practices, and ensure that they are in line with California’s requirements, in addition to those of any other applicable state or federal law.

February 03, 2014

Last week Nissan North America and advertising agency TBWA Worldwide signed consent agreements with the Federal Trade Commission, settling allegations that a Nissan Frontier truck advertisement, which aired in 2011, was deceptive. This is the latest in a series of actions the FTC has taken to curb deceptive automobile advertisements.

The ad in question showed a Nissan truck pushing a disabled dune-buggy up a sandy hill as onlookers cheer and shout. The FTC alleged that in reality the truck and buggy were both towed up the hill on cables and that the sand dune was manipulated to appear steeper than it actually was. These commercials, the FTC argued, misrepresented the abilities of the Nissan Frontier, which cannot actually push dune buggies up steep, sandy hills. The FTC complaint also noted that the ad was shot in a “realistic, ‘YouTube’ style, as if shot with a mobile phone video camera,” which seems to have contributed to the FTC’s belief that the advertisement deceptively portrayed the truck’s capabilities.

The FTC’s pursuit of these claims should remind advertisers that product demonstrations and depictions can constitute advertising claims about their products’ capabilities. While special effects are ubiquitous in advertising, advertisers must carefully walk the line between presenting attention-getting advertising and making inaccurate representations about their products. Disclaimers may help clarify for viewers the circumstances depicted in ads, but only if they are clear and conspicuous. The Nissan ad included the disclaimer “Fictionalization. Do not attempt.” but the FTC took the view that it was insufficient because it was in small text, displayed only for a short period of time, and disappeared before the truck was shown on screen.

The FTC doesn’t frequently bring complaints against ad agencies too, but it is not unprecedented. The FTC’s position is that an ad agency may be liable for deceptive advertising if it actively participated in the creation of the ad and knew or should have known the claim was deceptive (see discussion here). The FTC’s actions with regard to Nissan’s truck ad underscores the need for both advertisers and the ad agencies to pay close attention to the express and implied claims that the visuals in advertisements communicate to consumers.

January 28, 2014

This month the UK Advertising Standards Authority (ASA) highlighted the rules around the advertising of prescription-only medicines (POMs) as the ASA clamped down on two website-based advertising campaigns for the POM Botulinum Toxin A (more commonly referred to as “Botox”).

The advertising of POMs is prohibited under UK regulations (for example, the Human Medicines Regulations 2012 (HMRs)) and Rule 12.12 of the UK Code of Non-broadcast Advertising, Sales Promotion and Direct Marketing (Code). However, material of a purely factual and/or informative nature does not fall under the scope of the HMRs as “advertising” and so could not be considered an advertisement for the purposes of Rule 12.12. Reference or factual/informative content is therefore permitted, as long as it is a true reflection of the drug licence.

Two health and beauty clinics, Dermaskin Clinics and HB Health of Knightsbridge, made references to Botox on the home pages of their websites, with links through to pages with further details about the treatment. The Independent Healthcare Advisory Service and the ASA challenged whether the references breached the Code by advertising a POM to the public.

The ASA was concerned that visitors to the websites could access information about Botox directly, rather than following a consultation with a doctor. Furthermore, although some of the information provided was fair and factual, there was also promotional wording such as “revolutionary treatment”, “astonishing results” and “Botox dramatically softens facial lines and wrinkles leaving you looking younger”. Furthermore, POMs are only licensed for use of the therapeutic indications detailed in their summary of product characteristics (“SPC”) and Botox is only licensed for the treatment of glabella (frown) lines in the area of cosmetic therapy. However, the websites discussed the treatment of various other facial lines and wrinkles, such as “forehead wrinkles”, “bunny lines on the nose” and “smokers lines around the lips”.

Both advertisers agreed to remove references to Botox from their home pages, but the ASA felt that this did not resolve the issues. Dermaskin Clinics argued that references to treatment areas should take into account normal clinical practice, given that these uses of Botox are common amongst specialists and doctors.

The ASA ruled against the advertisers. Although the ASA understood that it was common in clinical practice for Botox to be used in areas not specified in the SPC, it considered that such references on the websites went beyond factual information that was representative of the SPC and constituted a promotion of a POM to the general public and a breach of the Code. The ASA warned both advertisers to take special care when referencing Botox in the future and were instructed to remove the adverts in their current form.

Although both of these rulings relate specifically to Botox, they provide useful guidance on the Code requirements around advertising of POMs more generally. There are three key takeaway points:

A medical consultation must be the subject of any advertisement, with the POM only referenced as a potential outcome.

Any information relating to a POM must be presented in a balanced and factual way and in all cases must reflect the content of the drug licence/SPC.

November 26, 2013

The Federal Trade Commission (FTC) and National Advertising Division (NAD) have both recently expressed interest in online “native advertising” or “sponsored content”—online advertising that consumers might mistake for non-commercial editorial content. Native advertising includes, for example, online advertisements that resemble news articles, sponsored links that are placed near search engine results, and blogs or social media accounts created to promote products. The FTC is hosting a one-day workshop on native advertising called “Blurred Lines: Advertising or Content” on December 4, 2013, and it has issued updated guidance on related issues during the past year. Also, the NAD recently issued a decision that addressed an advertiser’s alleged failure to identify online messages as advertising.

The FTC’s December 4, 2013 workshop will feature discussions about what advertisers and companies should do to ensure that consumers can distinguish online advertising from other content. According to the draft agenda, the workshop will include panels with representatives from the advertising industry, websites, academia, consumer advocacy organizations, and self-regulatory organizations. The workshop is free and open to the public. We expect that as a follow-up to the workshop the FTC will issue a report providing guidance for native advertising.

This workshop comes a few months after the FTC issued letters to search engine companies in June 2013, updating its 2002 guidance on distinguishing paid search results from “natural” search results. The letters reiterated the FTC’s position that it is a deceptive practice to display search results in a way that makes it difficult for consumers to distinguish sponsored links from organic or “natural” search results. In recent years, the FTC noted, it had “observed a decline in compliance” with the 2002 guidance as “the features traditional search engines use to differentiate advertising from natural search results have become less noticeable to consumers.” In the letter, the FTC suggested methods for search engines to distinguish paid and natural search results clearly and prominently, including visual cues and text labels.

In a recent decision, the NAD addressed a company’s alleged failure to disclose that certain messages on blogs and social media were advertisements. eSalon operated a blog that promoted its products, but the blog’s connection to eSalon was only disclosed at the bottom of the page, where the user had to scroll to view it. The NAD recommended several changes to make eSalon’s sponsorship of the blog clearer and more conspicuous to consumers. In addition, the NAD recommended that eSalon disclose any incentives that it has provided to reviewers of its products (such as compensation or free products) before re-posting or re-tweeting those reviews. Finally, citing the FTC’s Endorsement Guides, the NAD advised eSalon to stop using pictures of celebrities on its websites because this could lead consumers to believe incorrectly that the celebrities had endorsed eSalon’s products.

The requirement that advertisements should be distinguished from editorial content reflects principles from the FTC’s 2009 Revised Endorsement and Testimonial Guides. Endorsements are likely to lead consumers to believe that the message “reflects the opinions, beliefs, finding, or experiences of a party other than the sponsoring advertiser.” Accordingly, the Endorsement Guides provide guidelines designed to help consumers better evaluate the advertising message conveyed through endorsements. For example, advertisers must clearly and conspicuously disclose any material connections between themselves and endorsers, and advertisements with actors portraying “actual consumers” should clearly and conspicuously disclose that actors have been used.

Native advertising is also in the news due to Wikipedia’s recent announcement that hundreds of user accounts were affiliated with Wiki-PR, a company that allegedly creates or revises Wikipedia entries to advertise or promote its clients’ interests. The Wikimedia Foundation, which operates Wikipedia, responded by banning over 250 user accounts and issuing a cease and desist letter demanding that Wiki-PR stop editing Wikipedia. In the letter, Wikimedia explained that its Terms of Use prohibit users from “misrepresenting your affiliation with any individual or entity” and discussed the potential for legal action. Wikipedia’s policy echoes the guidance from the FTC and the NAD—paid-for messaging should not be presented as non-commercial content.

October 30, 2013

Last year UK supermarket chain Sainsbury’s was rapped on the knuckles twice by the UK’s Advertising Standards Authority (the ASA) for misleading statements and comparisons with rival supermarkets in advertising for its “Brand Match” campaign (May and October 2012 - see our report here). Sainsbury’s has now been dealt another blow on the same campaign.

The latest TV ad showed various people shopping at Sainsbury’s, Tesco and Asda. A voice-over said “Deals. Everywhere aren't they? But wouldn't it be nice if we didn't have to go everywhere to get them? That's why Sainsbury's Brand Match matches comparable branded deals at Tesco and Asda. So spend £20 or more and we'll tot up the prices of brands in your basket and if you could have paid less at Tesco or Asda, even because of a deal, we'll give you a coupon for the difference.”

Two viewers complained that the ad was misleading as they understood that the promotion compared the total cost of a branded shop (i.e. all branded items bought in one go) and that any coupon for the difference would be reduced if any branded products on offer at Sainsbury’s were cheaper than at Asda or Tesco, which meant that customers would still need to shop around for the best deal. Sainsbury’s disputed this and claimed that the voice-over and on-screen text made it clear that the comparison was of the total price of the branded shop.

Assessing the ad, the ASA considered that the overall message was that customers would not have to shop around to get the benefit of deals across the three supermarkets. Claims such as “those deals you love, just now in one place” and “wouldn’t it be nice if we didn’t have to go everywhere to get them?” reinforced the message.

They went on to highlight some of the technicalities of the promotion. Although the comparison and voucher were based on the total cost of all branded goods in the customer’s basket, the value of the voucher could be reduced if any individual items were cheaper at Sainsbury’s. This allows for situations where, despite the overall cost of a branded shop being cheaper at Tesco or Asda, the resulting voucher for the difference could be reduced, even to zero, by just one item being cheaper at Sainsbury’s.

The ASA concluded that the ad was misleading as the fact that a customer would, in some situations, still have to shop around in order to get the cheapest prices, was not made clear and indeed contradicted the overall message of the ad.

As Sainsbury’s clash with the ASA for the third time over the Brand Match campaign, this ruling highlights the need to take account of implied claims in addition to those expressly stated. The customer’s impression of an ad is just as important when it comes to meeting the requirements of the UK Code of Broadcast Advertising.

June 19, 2013

Snapchat is a mobile
phone application intended to allow users to send photos to their friends and
limit the amount of time for which the photos can be viewed. Once the allotted viewing time has elapsed,
Snapchat is meant to delete the photos entirely from the recipient’s device as
well as from Snapchat’s servers so that it cannot be accessed again. Snapchat
has gained quite a following since its launch in 2011; it currently reports
that its users send 150 million “snaps” per day. It seems, however, that the deletion of
users’ images on Snapchat might not be so permanent.

The Electronic Privacy
Information Center (EPIC), a self-described public interest research center
focusing on privacy issues and consumer advocacy, filed a complaint with the
Federal Trade Commission (FTC) on May 16, alleging that Snapchat’s
representations that its users’ photos “disappear forever” once viewed by a
recipient are deceptive and likely to mislead consumers. The complaint
alleges violations of Section 5 of the Federal Trade Commission Act and asks
the Commission to investigate.

Rather than entirely
deleting a file after it has been viewed, the FTC complaint alleges, Snapchat
adds a .nomedia extension to the end of the filename that is intended to
prevent the file from being accessed again once viewed. However, it is
easy enough for tech-savvy users to remove the .nomedia extension and render
the files viewable. Snapchat’s policies do not describe this process and
do not advise users that the files are recoverable. Snapchat’s privacy
policy does, however, state that “[a]lthough we attempt to delete image data as
soon as possible after the message is received and opened by the recipient. . .
we cannot guarantee that the message contents will be deleted in every case “
For example, the policy goes on to state, “users may take a picture of
the message contents with another imaging device or capture a screenshot of the
message contents on the device screen.”

The complaint alleges
that Snapchat’s representations to users “that photos sent using its app would
be deleted after a user-designated amount of time” are “likely to mislead the
reasonable consumer” and that those representations are material. In
addition to asking the FTC to investigate Snapchat’s claims that users’ images
are permanently deleted, the complaint asks that the FTC require Snapchat to
make improvements to its security practices to successfully delete users’
photos and to cure any deceptive statements about its services.

June 18, 2013

On June 3,
2013, over opposition from the food, agribusiness, and biotech industry,
Connecticut became the first state to pass legislation that
will require labels for food containing genetically modified (GMO)
ingredients. The legislation was hard
fought and went through several iterations before finally being approved
unanimously by the Connecticut Senate and overwhelmingly by the Connecticut
House. Connecticut’s Governor is
expected to sign the bill into law.

Crucial for
the food industry is a provision making the law contingent on the actions of
other states. As a result, GMO labeling
in Connecticut is not imminent.

GMO Labeling
Background

More than 20 other states are
considering similar labeling laws. In
2005, Alaska passed a law requiring the labeling of all genetically engineered
fish and shellfish, but it does not apply to all foods like the Connecticut
law. And just last fall, California’s
Proposition 37, which would have required GMO labeling, was defeated after a
long and expensive campaign. At the
federal level, in April 2013, Senator Barbara Boxer (D-CA) and Representative
Peter DeFazio (D-Or) introduced the first federal bill that would require GMO
labeling -- the Genetically Engineered Food Right-to-Know Act.

Moreover, as previously discussed
here,
the plaintiffs’ bar has brought lawsuits across the country challenging certain
claims on products (e.g., “All
Natural”) that they allege are inconsistent with GMO ingredients

Other actors are also taking
stances on GMOs and GMO labeling. In
March 2013, Whole Foods Market announced that it would require GMO labeling on
all products sold in its stores. Ben
& Jerry’s -- which actively participates in pro-GMO labeling efforts -- has
vowed that it will source non-GMO ingredients for all of its products by the
end of 2013. Many countries outside of
the US mandate GMO labeling, including the European Union, Australia, New
Zealand, China, and India. In fact, a
majority of European countries have banned the cultivation of genetically
modified crops.

As evidenced by the various
successes and defeats of GMO labeling laws, the debate over their utility
continues. A 1992 FDA policy statement
notes that GMO foods are not materially different from other foods. In noting his support for Connecticut’s bill,
however, Connecticut Senate President Donald E. Williams cited what he
considers “mounting scientific evidence showing that genetically modified foods
are harmful to our health.” As that
battle continues, supporters of the laws argue that regardless of the harms or
benefits, consumers have a right to know whether the foods they purchase
contain GMOs.

Should state requirements become
effective, litigation appears possible.
Opponents of state GMO-labeling requirements have pointed to a prominent
New England appellate decision that struck down a Vermont law requiring the
labeling of milk as being from cows treated with a hormone. International
Dairy Foods Ass’n v. Amestoy. The court applied the First Amendment to rule
that “consumer curiosity alone is not a strong enough state interest to sustain
the compulsion of even an accurate, factual statement.” In other words, “[a]bsent . . . some indication
that this information bears on a reasonable concern for human health or safety
or some other sufficiently substantial governmental concern, the manufacturers
cannot be compelled to disclose it.”

The Connecticut
Legislation

The debate
over GMO labeling laws led to several compromises in the Connecticut
legislation. Most significantly, there
are two triggers that must both occur before the law takes effect. First, four other states, including one that
borders Connecticut, must pass a similar bill.
Second, any combination of Northeastern states (Maine, New Hampshire,
Vermont, Massachusetts, Rhode Island, New York, Pennsylvania, or New Jersey),
with a combined population of at least 20 million people, must approve similar
legislation. Connecticut Governor Dannel
P. Malloy explained that these triggering provisions protected local farms by
“ensuring that the regional agricultural market has adopted the new labeling
system before placing an undue and disproportionate burden” on Connecticut
farmers.

Although pro-GMO labeling activists
criticize the triggers, they represent a compromise from a previous version of
the bill that exempted farms with less than $1.5 million in gross sales and
would have required five states with a total population of 25 million people,
including New York and New Jersey, to enact similar laws before Connecticut’s
would go into effect. The triggers
likely also stem from concerns that enactment of a GMO labeling law will result
in lawsuits against the state, which could require significant defense costs
for a single, small state.

Finally,
the Connecticut legislation exempts several categories of food from labeling:
(1) alcoholic beverages; (2) produce sold at roadside stands, pick-your-own
farms, and farmers’ markets; (3) meat from animals that were not genetically
modified but were feed genetically modified foods or were given genetically
modified drugs; and (4) food intended for immediate consumption that is never
packaged for retail sale.

The Maine
Legislation

In Maine, a
bill
with a similar trigger provision was passed overwhelmingly by the state senate
and house the week of June 10. More
legislative action will be needed before the bill can be presented for the
Governor’s approval, which is uncertain.
And to take effect, the Maine law would require either five other states
to enact similar legislation or a state or states with a combined population of
at least 20 million people to enact similar legislation.

May 20, 2013

Continuing its efforts to lead the country both in
establishing new requirements to help combat
human trafficking and requiring signs in businesses across the state,
California now requires certain businesses to post a special notice providing
information to potential and actual victims of human trafficking. The new law, S.B. 1193, went into effect on
April 1, 2013.

This posting requirement applies to bars, truck stops,
massage parlors, job recruitment centers, emergency rooms, and various other
establishments that trafficking victims might frequent. It is intended to raise public awareness of
the issue and to inform victims or potential victims of trafficking about their
rights and about resources available to help them.

There are specific requirements for the notice, which must
be 8 1/2 by 11 inches with 16-point font.
It must be posted near the public entrance or in some other conspicuous
place. It must be posted in both English
and Spanish throughout California, but in certain counties, it must be posted
in a third widely spoken language (e.g., Chinese in San Francisco). The language requirement and model notices
can be found here,
and the model notices are here (English) and here (Spanish).

Failure to comply with notice requirements results in a $500
penalty for the first offense and $1000 for subsequent offenses. The Attorney General and certain local
prosecutors are authorized to bring an action to impose the penalty, but there
is a 30-day cure period following notice of a violation.

Meanwhile, speculation continues about possible enforcement
of California’s original groundbreaking requirement on human trafficking, the
Transparency in Supply Chains Act (S.B. 657), which went into effect on January
1, 2012. As noted previously in
this space, many large manufacturers and retailers selling goods into
California are required to post on their websites information concerning their
efforts to combat human trafficking and other issues in their global supply
chains. The threshold for the reporting
requirement is low, and covered companies should take steps now to meet the
law’s requirements if they haven’t already done so. California Attorney General Kamala Harris has
made the issue of human trafficking a priority, as evidenced by this webpage, which collects
information related to efforts on human trafficking and includes her commitment
to “a sophisticated response from law enforcement and its partners to disrupt
and dismantle” trafficking networks.

May 13, 2013

An online retailer of video game hardware peripherals,
software, and systems, Razer, recently suffered an apparently costly glitch on
its UK website. A coupon code offering 90% off many products,
intended for use only in a behind-the-scenes test of the company’s website
shopping cart, was accidentally released
to the public. Customers naturally
jumped at the opportunity.

Razer is hardly the first online retailer to suffer such an
advertising glitch. Zappos and others have found themselves in a similar predicament. Generally, companies in that situation have
wasted no time repudiating any obligation to honor purchases made at the
erroneous price. But Razer took a different
tack. It quickly announced
that it would honor those coupons tendered by customers who bought “single
products for their own use,” as distinguished from those who bought multiple
items (presumptively for the purpose of turning a quick buck). It isn’t clear just how much this cost the
company, but it cannot have been inconsequential. On the other hand, for “doing right” by its
customers, the company was lionized in the media and may well have made back
that much and more in increased traffic, publicity and goodwill.

Putting aside the possible marketing advantages of
acquiescing in such an error, what are the rules
when a merchant accidentally advertises a lower price than intended? What right, if any, does the online retailer
have to repudiate the apparent deal?
After all, didn’t it make an offer to sell at a particular price that
became a binding obligation when the buyer accepted the offer by tendering the
purchase price? Was Razer being
benevolent, or just putting lipstick on the pig?

Well, it depends.

In the first instance, there may or may not have been a
binding offer and acceptance. Contracts
101 teaches that whether a communication from one party to another constitutes
an actionable offer, as distinguished from mere preliminary communications or
an invitation to make an offer, is a fact-intensive inquiry, looking at all the
circumstances. Even generalizations
aren’t particularly helpful. For
example, print advertisements such as those in newspapers and mail order
catalogs are less frequently held to be offers than the prices posted in
bricks-and-mortar stores. To the extent
this is a meaningful distinction, which is the appropriate analogy for an
online retailer? Is Amazon’s website
more like a virtual catalogue or a virtual store?

Some online retailers have adopted website terms and
conditions that attempt to overcome such uncertainties by explicitly
characterizing the customer’s order as the offer, thereby leaving
the retailer free to reject it for any reason, including because the advertised
price was erroneous. Others simply reserve the right to
cancel orders, either for any reason or specifically where the posted price was
erroneous. In addition, even absent such
contractual hedges, under the common law doctrine of unilateral mistake of
fact, a contract is voidable if its enforcement despite one party’s mistake
regarding a material term such as price would be “unconscionable” or if the
other party “had reason to know of the
mistake . . . .”
Thus, at least where a posted price is so egregiously low—or, in Razor’s
case, a coupon so dramatically over-generous—that a reasonable consumer would
suspect it is a mistake, this doctrine would entitle the retailer to repudiate
the contract.

On the other hand, none of these safeguards is necessarily
ironclad. The unilateral mistake
doctrine is so obviously fact-dependent that in all but the most egregious
circumstances, its applicability is likely to be disputable. Using agreed terms and conditions to avoid
the otherwise-uncertain application of general contractual rules is a
time-honored strategy. But online terms
and conditions are both adhesive in nature and
subject to special FTC rules
requiring that they be “clear and conspicuous.”
Thus, their enforceability is also inherently very fact-bound. And whatever protection the common law and
artful drafting might provide in other circumstances, some states impose
particular obligations
on retailers when it comes to honoring the prices they advertise, however
egregious the error.

In short, quite apart from the resulting public relations
bonanza, a retailer in Razer’s situation could hardly be faulted for concluding
that the high road was also the prudent one.

Razer apparently managed to turn the sow’s ear of its
pricing gaffe into a silk purse. Mindful
of this, some online marketing specialists are undoubtedly being tempted even
as we speak to consider the deliberate use of such an “accidental” release
scenario as a form of guerilla marketing: going viral, driving traffic to the
site, and winning kudos for “voluntarily” honoring some part of the resulting
uptake. One word: badidea. The saving grace of
Razer’s gaffe was its inadvertence. Deliberately posting a false discount to
drive traffic, with the intent to honor only
some of the resulting sales, would amount to a bait-and-switch, violate a
plethora of state and federal laws prohibiting deceptive and misleading
advertising, and likely leave the retailer in a world of hurt at the hands of
regulators, prosecutors and the plaintiff’s class action bar.

March 12, 2013

Customers buying seafood at
restaurants and grocery stores frequently may not be getting what they
order. A recent study
conducted by the group Oceana, found that 27 percent of grocery stores, 52
percent of non-sushi restaurants, and 95 percent of sushi restaurants surveyed
sold mislabeled seafood. The group describes itself as
the “largest international organization focused solely on ocean conservation.”

The Oceana study,
conducted from 2010 to 2012, is one of the largest reported seafood fraud
investigations to date. The group
collected 1,247 samples from 674 retail outlets in 21 states. Genetic identity was determined for 1,215 of
the samples, and of those, it was found that approximately one-third were
mislabeled. Mislabeling rates varied
greatly among the types of seafood involved, with fish sold as “tuna” and
“snapper” having the highest mislabeling rates.

In describing the methods
used for the study, Oceana stated that it considered a fish sample to be
mislabeled if “seafood substitution occurred or if retailers were not following
the [FDA] Seafood list.” The FDA’s Guide
to Acceptable Market Names for Seafood Sold in Interstate Commerce provides
guidance to the seafood industry on the labeling of different species. The FDA makes it clear that its Seafood
List does not establish legally enforceable responsibilities per se in labeling. However, seafood mislabeling can be actionable
under the Misbranding
Section of the Federal Food, Drug, and Cosmetic Act, and under state
statutory and regulatory provisions, as well as the common law.

Some critics of the study
have suggested that Oceana overstates
the mislabeling issue, noting that different vernacular names are used for
the same type of fish in different regions of the country. In fact, this illustrates the pitfalls that
even well-meaning retailers may face in attempting to label their seafood so as
not to mislead. Thus, the FDA itself
comments that a vernacular name, even if common in a particular region, may not
be acceptable as a market name for use in interstate commerce. When it comes to seafood, it’s not only the
quarry, but the name of the quarry
that can be elusive.

The obvious injury from
seafood mislabeling is that customers will be duped into paying more than they
should for what they are actually getting. But depending on the particular species involved, mislabeling can also
defeat customer attempts to choose sustainable seafood options. Fishery sustainability is a growing concern
of many conservation-minded consumers. In response, conservation organizations have published pocket guidelines
for consumers to use in making their seafood choices; and some grocery stores
and restaurant groups have taken to promoting their seafood sourcing policies to attract
environmentally-conscious customers. In
a prior post,
we discussed how seafood sustainability certifications themselves may be
misleading consumers in this regard.
Inasmuch as any certification process necessarily depends on accurate
labeling of the product being sold, seafood mislabeling has the potential to
exacerbate the problem.

There is potential legal
exposure for seafood businesses at every step in the supply chain here-- from
fishermen to brokers to retailers and restaurants. Certainly, those who intentionally mislabel
seafood for sale are subject to liability for fraud and unfair business
practices. Less clear is the degree of
exposure for retailers and middlemen who inadvertently sell mislabeled
fish. Following a similar seafood
investigation conducted by the Boston Globe, several restaurants blamed
suppliers for providing them with incorrectly labeled fish, which they in turn
innocently served to customers. Given
the apparent frequency and risks of such mislabeling, blind reliance on the
integrity and competence of one’s suppliers may not be
enough. Prudent retailers will consider
measured steps to better ensure that they are serving what they claim and
to demonstrate their own due diligence in that regard. Like chum in the water, Oceana’s study may
begin drawing the interest of state attorneys general and the plaintiff’s bar.

February 14, 2013

There is no
denying that the United States is facing a health crisis of obese proportions. To combat the problem, the Food and Drug Administration
(FDA) recently issued a proposed
food labeling rule and is asking the American public to weigh in. So what should
the government do to help us make healthier choices at the supermarket, and
what effect will this proposed rule have on businesses (and consumers) whose
profit margins already toe the line between slim
and emaciated?

The FDA’s proposed rule would
require calorie labels on menus and menu boards in chain restaurants and retail
food establishments −
including grocery and convenience stores as well as coffee and pastry shops − with 20 or more
locations nationwide. The FDA’s existing
food labeling regulations already mandate that pre-packaged food include
nutrition information labels, but this new rule would require grocery stores
“clearly and prominently” to label the calorie content of prepared, unpackaged
food such as soups, salad bar items, baked goods and other ready-made
snacks.For such food on display,
calories would have to be posted either per item or per serving on a sign next
to the food. I know what you’re
thinking: now I’m going to be forced to confront the waistline implications of
that gooey chocolate donut with cream filling before I enjoy it, or feed it to
my kids as a weekend treat? Unfortunately, that’s the point.

To help consumers understand the
significance of this information, a statement concerning daily recommended
calorie intake would also be on display.
Additionally, supplemental written nutrition information − such as calories from fat, total fat,
saturated fat, trans fat, cholesterol, sodium, total carbohydrates, sugars,
dietary fiber, and protein −
would be available upon request for standard menu items.

The proposed rule stems from a
provision of the Patient Protection and Affordable Care Act requiring
restaurants and vending machines with 20 or more locations nationwide to post
nutrition content for standard menu items.
The FDA’s rule extends that mandate to cover establishments that sell
restaurant-type food and whose primary business activity is the sale of food to
consumers. Under the rule, an establishment’s
“primary business activity” is the sale of food to consumers if greater than 50
percent of the establishment’s total floor area is used for the sale of
food. This includes grocery and
convenience stores, but excludes establishments such as movie theatres, bowling
alleys, and airplanes.

The FDA reasons that this rule is
aimed at helping Americans live healthier lives by informing them about how
prepared foods they purchase fit in to their overall nutrition needs. Seeing calorie content may incentivize some
shoppers to choose the three-bean salad over the higher-calorie mac and
cheese. Critics
of the rule claim that it would overburden thousands of grocers and
convenience store owners by requiring investment in either expensive software
or off-site laboratory testing to determine the nutrition content of food. The FDA estimates an initial cost of $315
million to comply with the proposed regulation, while critics of the rule warn
that compliance could weigh in at a hefty $1 billion in the first year
alone. That cost, some argue, will
inevitably be passed on to consumers in the form of plumper prices at the checkout.

Let the FDA know where you fall on the scale. The FDA invites public
comments to the proposed rule, which it says will be taken into account
when drafting the final rule to be issued this spring. Until then, grocers and other store owners
that may be affected by this rule should plan for a possible new expense.

January 24, 2013

Four
retailers have agreed to pay a combined $1.26 million to settle Federal
Trade Commission charges that they violated the Textile Products Identification
Act and the FTC’s Textile Rules by marketing and advertising
rayon products as made of bamboo. According to the FTC, the companies’ textile product labels and
advertisements −
such as “bamboo,” “100% bamboo fiber,” or “55% Bamboo/45% Cotton” − constituted unfair or
deceptive advertising because the products were made of rayon and not actual
bamboo fibers woven into fabric. (Long-term readers of this blog will recall that similar FTC enforcement
actions were a topic of interest in August
2009 and February
2010.) The settlement does not
constitute an admission of wrongdoing by any of the retailers.

The recent trend of marketing products as made of bamboo is
an attempt to appeal to the growing market of consumers that consider “green”
the new black. However, the process for
manufacturing rayon is hardly eco-chic -- rayon is a man-made fiber that is
created from the regenerated cellulose of many plants and trees, including
bamboo.

In August 2009, after settling similar claims
with other companies, the FTC distributed a business alert, How
to Avoid Bamboozling Your Customers, cautioning textile manufacturers and
sellers that if a product is not made directly with bamboo fiber, it may not be
advertised as “bamboo,” even if bamboo was used somewhere in the production
process. Rather, textile products
composed in whole or in part of regenerated cellulose fiber should be labeled
using the generic fiber name: rayon. The
FTC also said that if bamboo is used as the raw material, the product can be
labeled “rayon made from bamboo,” which accurately indicates that bamboo was
used to make the rayon without implying that the product has the environmentally-friendly
qualities of pure bamboo fiber.

Furthermore, in January 2010 the FTC sent a warning
letter to more
than 78 companies, including the four retailers in this case, informing
them about potential civil liability for claiming that rayon products were made
of bamboo, and urging them to correct any misleading claims. The FTC
alleges that despite the warning, these companies continued to improperly
label and advertise rayon textiles as “bamboo” products. The settlement amounts in these cases were
determined in part by how long the companies allegedly continued to sell
mislabeled products after receiving the January 2010 warning letter from the
Commission.

And, consistent with current law, the settlement orders
allow the companies to avoid future liability by obtaining a “good faith”
guaranty from suppliers certifying that products are not mislabeled, falsely
invoiced, or falsely advertised. This
“good faith” provision does not apply, however, if the company knew or should
have known that products were mislabeled.
The orders make clear that if the Commission sends a warning letter
about improper labeling (as it did in this case), that company is on notice and
is thus precluded from relying on a supplier’s guaranty to avoid
liability. The orders also state − consistent with the
FTC’s new Enforcement
Policy Statement −
that if the company cannot obtain a good faith guarantee from the supplier, as
long as the company does not (i) embellish claims provided by the supplier, or
(ii) sell the product as a private label product, the company will not be
liable for a Textile Act violation unless it knew or should have known that the
product was improperly labeled.

It is clear that the FTC is intent on cutting down all
misleading bamboo claims. It is
important that retailers of textile products assess their labeling and
advertising claims to ensure that the fiber content and environmental benefits
of such products are not being misrepresented, especially after receiving a
warning letter from the Commission.

January 03, 2013

As social media becomes more pervasive in
today’s society, it has become a dominant part of many companies’ marketing and
public relations strategies. With
companies and their executives incorporating Facebook, Twitter and the like
into their communications strategies, they often step into grey areas of securities
laws. The law that seems to cause the
most trouble is Regulation Fair Disclosure (RegFD). Promulgated by the Securities and Exchange
Commission (SEC) in 2000, RegFD requires that whenever a company, or a person
acting on its behalf, discloses material, nonpublic information to analysts or
company stockholders, the company must make that information simultaneously
available through broadly disseminated public disclosure. Traditionally, corporations have complied
with RegFD by issuing a press release or filing or furnishing a Form 8-K with
the SEC.

In recent weeks, a story has
come to light that illustrates the growing tension between securities laws and
social media communications. On July 3,
2012, Netflix CEO Reed Hastings posted the following message on the company’s
public Facebook page: “Netflix monthly
viewing exceeded 1 billion hours for the first time ever in June [2012].” After this post was broadcast to the
company’s more than 200,000 Facebook followers, Netflix stock jumped from
$67.85 a share on July 2, 2012 -- the day before the post -- to $81.72 on July
5, 2012. As a result, the SEC sent both
Netflix and Hastings a letter (known as a “Wells Notice”) informing them of the staff’s intent to
recommend enforcement proceedings for violation of RegFD.

In
2008, the SEC issued guidance that provides clues to how it will likely
address Hastings’ Facebook post. Whether the SEC will bring an action against
Hastings and Netflix will probably depend on: (i) whether the post by Hastings
discloses material information; (ii) whether such information was nonpublic;
and (iii) if the answer to both (i) and (ii) is “yes,” whether the Facebook
post constitutes broad, nonselective distribution of such material, nonpublic
information.

Is the post by Hastings “material”?

In a public response to the SEC’s
investigation, Hastings stated: “We think the fact of 1 billion hours of viewing in June was
not 'material' to investors." The
SEC will likely argue that a 17% jump in stock price in only three days
suggests otherwise. Additionally, the
SEC will likely point out that Netflix, on recent earnings calls and in prior
press releases, has highlighted hours viewed as a key metric. Because Netflix has consistently pointed to
this metric in the past, it may now face an uphill battle in arguing the
statistic is immaterial.

Does a
Facebook post result in broad distribution of material corporate
information?

In
other words, and specific to Netflix and Hastings, does a Facebook post
broadcast to more than 200,000 individuals provide at least as broad of a
disclosure as a press release or an SEC filing?
In its 2008 guidance, the SEC stated that when corporations make
disclosures via their corporate websites the concern is whether such
communications are (i) disseminated in a manner designed to reach the public in
general and (ii) being made through a recognized channel of distribution. The SEC likely has the same concerns with
respect to corporate social media communications.

On the first point, Hastings
and Netflix have stated they believe posting to over 200,000 followers is very
public, especially because many of those who subscribe to the Netflix Facebook
page are reporters. Hastings and Netflix
make a persuasive argument that a Facebook post, which automatically broadcasts
to all those individuals that have subscribed to the page, provides a public
and transparent means of communications that is more likely to reach the public
in general than a filing with the SEC of which no one is automatically
notified.

On the second point, the SEC has suggested that corporations can
establish recognized channels of distribution by consistently directing
investors to such channels in SEC filings and investor relations
communications. Unfortunately for Hastings and Netflix, Netflix has not consistently
directed investors to Hastings’ Facebook posts in its SEC filings and investor communications. Moreover, Hastings stated in his public
response to the SEC Wells Notice that
"[w]hile we think my public Facebook post is public, we don't currently
use Facebook and other social media to get material information to investors;
we usually get that information out in our extensive investor letters, press
releases and SEC filings . . . .”
Netflix and Hastings could face an uphill battle in arguing Hastings’
post disseminated such information via a recognized channel of disclosure.

Regardless of the outcome,
corporations and their attorneys will certainly pay close attention to this
investigation of Netflix and its CEO, as this could become a precedent setting
case or, at a minimum, will provide clues to corporations with respect to the
SEC’s likely treatment of social media communications going forward.

November 29, 2012

The Federal Trade Commission (FTC) hasissued warning letters to 22 hotel operators, explaining
that online reservation sites may violate the law by failing adequately to
disclose “resort fees,” mandatory fees hotels charge for amenities such as
newspapers, exercise or pool facilities, and internet access that are charged
even if the customer may not use those services. The FTC letter describes
practices it found on the operators’ sites, such as quoting only the room rate
and taxes prominently and listing the additional resort fee separately, either
somewhere else on the page or on another page, or in some cases, not at all, or
stating only that additional fees may apply.

While acknowledging that a “hotel reservation site may breakdown the
components of the reservation estimate (e.g., room rate, estimated taxes, and
any mandatory, unavoidable fees),” the FTC letter explains that the “most
prominent figure for consumers should be the total inclusive estimate” that
includes all “unavoidable and mandatory fees.”
The warning letter concludes by “strongly encourag[ing]” the hotel
operators to review their websites “to ensure you are not misrepresenting the
total price consumers can expect to pay when making a reservation.”

The hotel warning letters reflect the FTC’s increased focus on complaints
regarding “drip pricing,” a pricing technique where a company advertises only
part of a product’s price and reveals other charges as the customer completes
the purchase. In May 2012, the FTC held
a conference on drip
pricing, and encouraged consumers to share their drip pricing stories with the
FTC. The FTC noted that “drip pricing is
used by many types of firms, including internet sellers, automobile dealers,
financial institutions, and rental car companies.” And the FTC noted that “drip pricing”
includes not only mandatory charges
(such as hotel resort fees), but also fees for optional upgrades and add-ons.
The lesson for sellers, particularly on-line sellers, is that the FTC is
watching how prices and fees are being disclosed to consumers and expects
sellers clearly and conspicuously to disclose all elements of the total cost up
front so that consumers are not surprised by what they ultimately pay.